NIO (NYSE:NIO) shares are among the worst performing US-listed shares over the past 12 months. The electric vehicle (EV) stock is down 58%, reflecting the company’s slower-than-anticipated growth. The stock has performed significantly worse than its peers over the period, including Li Auto and Tesla.
I can also see that NIO is in a hyper-growth phase, characterised by continuing revenue improvements but consistently negative EPS. And this contributes to a highly volatile share price.
The stock now trades below $8 — down from highs above $60 — and at just 1.75 times sales. By comparison, Tesla P/S ratio is nine.
So is it worth investing in? Well, I have very little exposure to growth stocks, but I believe NIO is hugely promising. Here’s why I think it’s worth investing in… and why I’ve done so.
Strong investment proposition
When I invest in a company, there has to be a strong investment proposition. In other words, I have to believe in the business. That’s certainly the case with NIO. Obviously, I see considerable growth in the EV market over the coming decade, but NIO is a pioneer in battery swapping and sets itself apart with its ESG considerations — getting an ‘A’ rating by MSCI.
It’s premium smart EV also comes with a Battery-as-a-Service (BaaS) model. As batteries can constitute a sizeable proportion of the cost of an EV, the service allows customers to use a subscription model for battery packs, thus eliminating that upfront cost.
It also backs up its premium pricing with premium performance. Several NIO vehicles beat their Tesla counterparts on range — but not speed. The vehicles are also packed full of gadgets, including voice-activated window and boot opening.
Of course, this is all very promising. But investors will rightly be concerned about the break-even date being pushed back a year until 2026. Until then, the firm will continue to burn through its $6.1bn in cash.
Collectively, these factors are why I’ve seen some analysts suggest NIO will run out of money, and other analysts forecasting a $200 share price. I don’t foresee either happening soon, but I’m backing the firm for growth.
Reasons for optimism
Beyond the obvious catalysts, I can see four reasons for optimism in the near term. Firstly, there is significant demand for certain models. The E6 SUV received over 30,000 pre-orders in the three days following the announcement of its launch in May.
And this leads me to the second catalyst, an impressive range of vehicles. Companies should have a range of products. It sounds simple, but to compete on sales, choice is really important. In addition to its line of sedans, in December, NIO unveiled its flagship ES8 SUV and the EC7 coupe SUV — the latter being a new body type for NIO.
Thirdly, NIO has been focusing on sedan output, or responding to demand. Its sedan delivery share increased to 74% in April, up from 69% in March and 56% in December. These vehicles are increasingly popular in China.
Over the past 12 months, supply chain bottlenecks have seen delivery figures disappoint, meaning it hasn’t always had the capacity to satisfy demand. But the Shanghai-based company did recently announce it would be building two further factories in an effort to increase floorspace and output. This should provide further economies of scale.
